Getting Real About Gas Prices

Woe! Woe to the politician who is perceived to be failing to do something about the soaring price of gasoline, which has jumped about 20 percent in the past six months. Every week, drivers feel the bite on their pocketbooks as they pull up to the pump. AAA estimates the average two-car household will consume more than 1,200 gallons of gasoline a year. That means the 50-cents-a-gallon increase over the past year has families spending an extra $600 of after-tax money each year, squeezing middle- and low-income families the most.

Americans can't stop driving, but this means they'll have to spend less on other items. For every penny that gas prices rise, about $1 billion comes out of the pockets of consumers, so the 20 percent increases at the pump will wipe out about half the expected $60 billion in tax cut benefits flowing to households this year.

The Democrats blame President Bush, saying he doesn't care because higher prices mean bigger profits for his oil-industry buddies. The Republicans attack John Kerry for his one-time support of a 50-cents-a-gallon tax hike and other votes in favor of gas-tax increases.

Chinese drivers. This time nobody is sure that the spike in oil prices will be short-lived. The money-grubbing OPEC countries, having regained their grip on the world market, have announced another reduction in output to drive prices even higher, exploiting a global market that is heating up primarily because of demand from Asia. Global oil demand grew by about 14 million barrels a day over the past 15 years. Worldwide oil consumption is estimated to jump another 45 million barrels a day by 2030--and demand for natural gas will also soar.

The big story, though, is Asia. Who could have imagined that India and China would become such big consumers? Chinese demand grew by 33 percent last year and by an additional 20 percent this year, pushing consumption to over 6 million barrels a day. China is on the verge of an exploding demand for automobiles. Gasoline consumption will have risen from about 10 percent of China's oil needs 10 years ago to an estimated 40 percent by the end of this decade, when private car ownership is expected to soar to almost 28 million. Those people with incomes high enough to afford autos in India and China are growing by about 12 percent a year. No longer will 80 percent of the world's energy be used by only 20 percent of the world's population.

And what about supply? No one is paying attention to the experts' warnings, any more than they did nearly 50 years ago. Back then, the United States was the world's biggest oil producer, pumping more than half as much again as the Soviet Union and twice as much as many Middle Eastern countries. But the Cassandras, as it turned out, were right. U.S. production peaked, in 1970, at about 10 million barrels a day and is now at least 30 percent below that. As for the OPEC countries, we know very little about their potential for new energy sources. Most of their oil comes from a handful of old oil fields, concentrated in a small area called the "golden triangle." It has been years since any significant new fields have been found. Whether Saudi Arabia could step up production from its current level, 8 million barrels a day, to 20 million barrels a day by 2020 is questionable. Political turmoil, meanwhile, besets producers like Venezuela and Nigeria.

Without subscribing to any particular permuation of the Peak Oil theory, the simple fact is that the environmental damage caused by the fossil fuel industry and the growth of demand will continue to cause pressure on the market that cannot be met on the supply side. Either the supply won't be there in sufficient quantity, or the costs of extraction and pollution abatement will increase along with the available supply. Either way, prices are headed up, not down.

A coworker of mine just got off an engineering contract with Chevron in Bakersfield, CA. His work involved seeing what parts could be salvaged from their wells that had gone "dry" to move to other fields. He said, uncategorically, that supply is dwindling in that area and unlike in the past, they are not simply buying new equipment but reusing old parts. He interpreted this as a lack of confidence in their ability to open new fields, so they want to stock up on replacement parts by salvaging from inoperative wells.

We do in fact have demand-driven price increases in the crude oil market. From http://www.chron.com/cs/CDA/ssistory.mpl/business/2500834:

Oil prices rise on Chinese demand, Iraq turbulence Reuters News Service

NEW YORK - Oil prices rose today, lifted by strong global demand paced by China's booming economy and worries about oil security amid growing violence in Iraq, analysts said.

"We're surging off the IEA report, which had a bullish outlook in terms of global demand," said Marshall Steeves, a market analyst at Refco LLC.

At the same time, another strong rise in gasoline futures buoyed the overall energy market, Steeves said.

May gasoline futures in New York hit an all-time high of $1.1830 a gallon on Monday, as record high prices at the pump did not appear to deter U.S. drivers from filling their tanks, traders said.

Rising Chinese demand and Iraqi jitters overshadowed news that OPEC kingpin Saudi Arabia was increasing some Asian exports in May because many of its refineries were undergoing maintenance, and that the Saudis will keep May crude supplies to U.S. refiners steady.

Light U.S. crude on the New York Mercantile Exchange was 62 cents a barrel higher at $37.76 as trading resumed after a three-day Easter weekend. It ended overnight ACCESS trading 24 cents higher at $37.38.

The International Petroleum Exchange in London, where Brent crude futures are traded, was closed for Easter Monday.

A report Friday from the Paris-based International Energy Agency said growth in Chinese oil demand continued to surpass expectations.

The International Petroleum Exchange raised its estimate of Chinese oil demand in the first quarter by 180,000 barrels per day to a record 6.14 million bpd, an 18 percent increase from the same period last year.

Crude imports by China, the world's second largest oil consumer, soared 35.7 percent year on year in the first quarter of the year, the official Xinhua news agency said on Monday.

The soaring Asian demand, a recovering U.S. economy and a steady European market offset Friday's forecast by the IEA that the 10 OPEC members bound by quotas showed no signs of tightening compliance in March and appear to remain well in excess of the new quotas in April.

Oil prices rallied last week after news that U.S. commercial crude inventories fell in the week to April 2, charting an percent rise on the holiday-shortened week.

Traders also talked of the market adding a security premium as a result of the violence in Iraq.

U.S., Japanese and Chinese civilians in Iraq have been kidnapped by insurgents in recent days, even as the U.S.-led coalition attempts to quell resistance that flared up in Falluja and other cities.

The lack of control by the U.S.-led occupation renews uncertainty about Iraq's ability to bring oil exports back to pre-war levels.

"I think higher prices in ACCESS represented an increase in the security premium," said Mike Fitzpatrick, an analyst at Fimat USA.

OPEC ministers agreed on March 31 to keep at least the cosmetic lowering of its production quota by 1 million bpd from April 1.

With OPEC's reference crude oil basket price up at $32.37 as of Thursday, the same day NYMEX crude tacked on nearly $1, it is not difficult to see why cartel members are tempted to produce over quota.

Three Japanese refiners confirmed they had been given notice of increased supplies from Saudi Arabia in May, while U.S. customers of Saudi crude said they were told they will receive the same amount in May as they did in April.

We go through this periodically. They said the same thing about coal many years ago. We were running out and that was that. The fact is, oil is like any other commodity. We will NEVER run out of oil. Simply put, as oil becomes harder to find and more expensive to drill the price will go up. As the price goes up consumption will go down and other sources of energy will become cheaper by comparison. Eventually, the demand for oil will drop to a point where far less is needed than is avaialable and oil wells will be plugged for want of demand.

The reason for the high cost of gasoline now is the dramatic and somewhat unexpected increase in demand. With the higher prices production will increase and the demand will go down. All it will take is for the commodity investors to blink and the price could plummet suddenly. Gasoline, in real dollars has been more expensive than it is today, yet only 18 months or so ago it was under a dollar a gallon. The liberals would love to make this "a sky is falling" story, but don't buy it.

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.